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Starting an IT Business? – The Legal Issues

Business Review Weekly (‘BRW’) recently reported that six of the top ten companies in this year’s BRW Fast 100 are from the IT sector. However, according to IP Australia only 5% of technology driven start-ups are still trading after three years. Businesses wishing to enter the booming IT sector therefore have a number of preliminary issues to consider if they are to enjoy a long and prosperous lifespan.

From the outset, it is vital to identify an appropriate business structure that will strike the right balance between set-up and maintenance costs, and tax incentives. There are a variety of structures through which to conduct a business, the most common being partnership, company and trust. Each structure has its advantages and disadvantages, but the decision on which structure to choose will depend on the unique requirements of a business. Tailored legal and financial advice is necessary at this stage in order to maximise the chances of creating a successful business.

Once a business structure has been decided upon, finance will need to be obtained. Generally speaking, the two types of finance available are debt capital and equity capital.

Debt capital usually comprises a loan from a financial institution, such as a bank, to the business. The business owner will need to provide security for the loan in case the business owner defaults on repayments. Obtaining debt capital can be problematic for IT businesses as their major asset may well be intangible intellectual property. A bank may not be willing to take security on something of undetermined value. As a result, many business owners put up their property as security when raising debt capital. For this reason, equity capital may provide an attractive financing option for IT businesses.

With equity capital, an investor will provide capital with a view to gaining a portion of the business profits if and when the business is successful. A common example of equity capital is the issue of shares in a company.

One key to ensuring a successful business and investor return is to protect any intellectual property the business may own. Perhaps the most obvious form of intellectual property related to a business is a trademark. A trade mark is a sign that is used to distinguish the goods and services of one person from those of another in trade, such as a business name or logo. Registering a trade mark will provide protection against other people using that trade mark, and thereby allow the registered owner to fully benefit from and develop the goodwill of the business.

Patents are a valuable asset for a business that may also be sought in order to protect any invention or business method a business may create. An example of a patented business method is Amazon’s one-click shopping basket. A patent grants the inventor or owner the exclusive right to manufacture and sell his or her invention. The patent provides the inventor with a monopoly over their invention, typically for a 20 year period.

The protection of confidential information should also be considered when setting up a business particularly during the early stages, where key products or strategies are being developed. Generally speaking, confidential information is information that is not in the public domain and holds an element of secrecy. In order to protect against employees using confidential information to establish a rival business, it is important to implement non-disclosure or contractor agreements prior to commencing any business development. Carefully drafted restraint of trade clauses should also be considered for employee contracts. These precautions may provide legal redress where the valuable confidential information of a business is used by other parties for a rival purpose.

Once a business is up and running, the issue of assignment and licensing of copyright might be considered. Where financially viable, a business who owns copyright in a product may agree to assign that copyright to another party. On payment of an assignment fee, the other party becomes the new copyright owner. Alternatively, a business can retain copyright ownership and licence it for use by other parties in return for royalties. For example, an IT business may have developed a piece of software that it wants to exploit, but only has a business presence in Australia. Rather than attempt to establish a presence in an overseas market, the business can license the software to another business that already has a presence in the overseas market. The Australian business therefore benefits from the established business goodwill and distribution within the overseas market.

Establishing a presence in overseas markets is somewhat easier if a business has a registered internet domain name, such as https://www.yourbusinessname.com.au. Many businesses, particularly those in the IT sector, rely heavily on the Internet to attract business. The Internet allows businesses to attract a larger audience than they otherwise would through traditional advertising methods, and at a lower cost. A registered domain name is therefore a valuable business asset. To register a “.com.au” domain name, a registered business name will be required. Domain names should only be registered through an accredited Domain Name Registrar.

In addition to domain name registration, businesses wishing to create an online presence will require additional contracts that provide indemnity against future disputes. At the very least, businesses with an online presence should have a terms and conditions of use, disclaimer and privacy policy.

These are only a few of the issues that should be considered before delving into the realm of IT start-up businesses; however an awareness of them will give your business a better chance of survival.